AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

These regulations provide comprehensive guidance for the award
program authorized under Internal Revenue Code (Code) section 7623,
as amended. The regulations provide guidance on submitting information
regarding underpayments of tax or violations of the internal revenue
laws and filing claims for award, as well as on the administrative
proceedings applicable to claims for award under section 7623. The
regulations also provide guidance on the determination and payment
of awards, and provide definitions of key terms used in section 7623.
Finally, the regulations confirm that the Director, officers, and
employees of the Whistleblower Office are authorized to disclose return
information to the extent necessary to conduct whistleblower administrative
proceedings. The regulations provide needed guidance to the general
public as well as officers and employees of the IRS who review claims
under section 7623. This document also provides notice of a request
for a public hearing on the proposed regulations.

DATES:

Electronic or written comments and requests for a public hearing
must be received by February 19, 2013.

SUPPLEMENTARY INFORMATION:

Background

Section 406 of the Tax Relief and Health Care Act of 2006, Public
Law 109-432 (120 Stat. 2922), enacted on December 20, 2006, amended
section 7623 of the Code on the payment of awards to certain persons
who provide information to the Internal Revenue Service relating to
the detection of underpayments of tax and violations of the internal
revenue laws. Section 406 redesignated the existing statutory authority
to pay awards at the discretion of the Secretary of the Treasury as
section 7623(a), and it added a new provision regarding awards to
certain individuals as section 7623(b). Generally, section 7623(b)
provides that qualifying individuals will receive an award of at least
15 percent, but not more than 30 percent, of the collected proceeds
resulting from the action with which the Secretary proceeded based
on the information provided to the IRS by the individual. Section
406 also addressed several award program administrative issues and
established a Whistleblower Office within the IRS, which operates
at the direction of the Commissioner, analyzes information received
under section 7623, as amended, and either investigates the information
itself or assigns the investigation to the appropriate IRS office.

In Notice 2008-4, 2008-1 C.B. 253 (January 14, 2008) (see §601.601(d)(2)(ii)(b) of this chapter), the IRS provided guidance on filing
claims for award under section 7623, as amended. In the notice, the
IRS recognized that the award program authorized by section 7623(a)
had been previously implemented through regulations appearing at §301.7623-1
of the Procedure and Administration Regulations. The Internal Revenue
Manual (IRM) provided additional guidance to IRS officers and employees
on the award program authorized by section 7623(a). The notice provided
that the IRS would generally continue to follow section 301.7623-1
and the IRM provisions for claims for award within the scope of section
7623(a), subject to certain exceptions listed in the notice. The
notice also provided, however, that the regulations would not apply
to the new award program authorized under section 7623(b). Instead,
the notice provided interim guidance applicable to claims for award
submitted under section 7623(b).

On March 25, 2008, the Treasury Department (Treasury) and the
IRS published Temp. Treas. Reg. §301.6103(n)-2T, and corresponding
proposed regulations, describing the circumstances and process in
and by which officers and employees of the Treasury may disclose return
information to whistleblowers (and their legal representatives, if
any) in connection with written contracts for services relating to
the detection of violations of the internal revenue laws or related
statutes. Under these regulations, whistleblowers and legal representatives
who receive return information are subject to the civil and criminal
penalty provisions of sections 7431, 7213, and 7213A for the unauthorized
inspection or disclosure of return information. The Treasury and
the IRS finalized the proposed regulations on March 15, 2011 (T.D.
9516, 2011-13 I.R.B. 575).

In December 2008, the IRS revised IRM Part 25.2.2, updating
policies and procedures concerning the handling of information, processing
of claims for awards, and payment of awards under section 7623, as
amended. The IRS also redelegated the authority to approve awards
to the Director of the Whistleblower Office. In July 2010, the IRS
further revised IRM Part 25.2.2 to provide detailed instructions to
IRS officials and employees on the computation and payment of awards
under section 7623 and to describe the administrative procedures applicable
to claims for award under section 7623(b). The revised IRM introduced
many guidance elements that are developed in these proposed regulations,
including definitions of key terms, the whistleblower administrative
proceedings, the fixed percentage award framework and criteria for
making award determinations, and rules on handling multiple and joint
claimants.

On January 18, 2011, Treasury and the IRS published proposed
regulations (REG-131151-10, 2011-8 I.R.B. 519) clarifying the definitions
of the terms proceeds of amounts collected and collected proceeds for purposes of section 7623 and providing
that the provisions of existing §301.7623-1(a), concerning refund
prevention claims, apply to claims under both section 7623(a) and
section 7623(b). The proposed regulations further provided that the
reduction of an overpayment credit balance constitutes proceeds of
amounts collected and collected proceeds for purposes of section 7623.
The Treasury and the IRS finalized the proposed regulations on February
22, 2012 (T.D. 9580, 2012-16 I.R.B. 801).

Explanation of Provisions

The purpose of these regulations is to provide comprehensive
guidance for the award program authorized under section 7623, as amended.
Accordingly, these regulations provide guidance on issues relating
to the award program from the filing of a claim to the payment of
an award, focusing on three major elements of the program: (i) the
submission of information and filing of claims for award; (ii) the
whistleblower administrative proceedings applicable to claims for
award under section 7623; and (iii) the computational determination
and payment of awards. These proposed regulations also provide definitions
of key terms under section 7623 and provide that the Director, officers,
and employees of the Whistleblower Office are authorized to disclose
return information to the extent necessary to conduct whistleblower
administrative proceedings.

These proposed rules apply generally to claims for award under
both section 7623(a) and section 7623(b), unless otherwise stated.
Nonetheless, while the Whistleblower Office will, for example, conduct
whistleblower administrative proceedings pursuant to the proposed
rules of §301.7623-3 for claims for award under both section
7623(a) and section 7623(b), the process applicable to claims under
section 7623(a) differs from that applicable to claims under section
7623(b). The differences reflect the clear distinction the statute
draws between awards under section 7623(a) and section 7623(b) and
will avoid placing a heavy administrative burden on the IRS.

Submitting Information and Filing Claims for Award

Section 301.7623-1 of these proposed rules provides guidance
on submitting information to the IRS and filing claims for award with
the Whistleblower Office. These rules are intended to clarify the
process individuals should follow to be eligible to receive awards
under section 7623. The proposed rules, in large part, track the
rules that Treasury and the IRS have previously provided, as set forth
in the existing regulations, Notice 2008-4, and the IRM. This includes,
for example, the general information that individuals should submit
to claim awards and the descriptions of the type of specific and credible
information regarding taxpayers that should be submitted. Most notably,
an individual submitting a claim should identify a person and describe
and document the facts supporting the claimant’s belief that
the person owes taxes or violated the tax laws. The proposed rules
clarify that the IRS will consider an individual who identifies a
pass-through entity as having identified the taxpayers with direct
or indirect interests in the entity. Furthermore, the proposed rules
provide that if an individual identifies a member of a firm who promoted
another identified person’s participation in an identified transaction,
then the IRS will consider the individual as having identified both
the firm and all the other members of the firm. These clarifying
provisions complement the proposed rules’ definition of the
term related action.

The proposed rules also include eligibility requirements for
filing claims for award and a list of ineligible claimants. The list
of ineligible claimants restates the list published in Notice 2008-4
in its entirety. For example, the proposed rules provide that individuals
who are or were required by Federal law or regulation to disclose
information are not eligible to file claims for award based on the
information.

To enable the IRS to administer the award program, these proposed
regulations require individuals to file formal claims for award.
The proposed rules provide a process for perfecting incomplete claims
for award and permit claimants to perfect and resubmit deficient claims
after they are rejected by the Whistleblower Office. Finally, the
IRS is considering issues relating to the electronic filing of claims
for award, which may be addressed in other published guidance.

The proposed rules also reaffirm the practice of Treasury and
the IRS to safeguard the identity of individuals who submit information
under section 7623 and these proposed regulations whenever possible.
The informant privilege allows the Government to withhold the identity
of a person that provides information about violations of law to those
charged with enforcing the law. The informant privilege is held by
the Government, not the informant, and is not an absolute privilege.
There may be instances when, after careful deliberation and high-level
IRS approval, the disclosure of the identity of an informant may be
determined to be in the best interests of the Government. For example,
an informant’s identity will have to be revealed when a claimant
is needed as a witness in a case in litigation. The IRS will, however,
make every effort to notify an informant before disclosing the informant’s
identity.

Comments are specifically requested on:

(1) The list of ineligible claimants provided in paragraph (b)(2)
of §301.7623-1 of these proposed regulations and whether other
identifiable groups of individuals should be treated as ineligible
to file claims for award.

(2) Whether electronic claim filing would be appropriate and
beneficial to claimants, and, if so, what features should be included
in an electronic claim filing system.

Definitions of Key Terms

Section 301.7623-2 of these proposed regulations defines several
key terms for purposes of determining awards under section 7623 and
the proposed regulations. Two other key terms, planned
and initiated and final determination of tax, are described and defined, respectively, in §301.7623-4 of
these proposed regulations. The definitions are intended to facilitate
the IRS’s administration of the award program in a manner that
is consistent with the statutory language. As described below, several
of the definitions, including the definition of the terms proceeds based on, related action, and collected proceeds, build on definitions
contained in Notice 2008-4, TD 9580, and the IRM, while other definitions
are new.

Generally, section 7623(b) provides that if the Secretary proceeds
with an administrative or judicial action (including any related actions)
based on the information provided by the individual, then the individual
will receive an award from the collected proceeds resulting from the
actions. The definition of the term proceeds based on contained in these proposed regulations reflects the ways in which
information provided to the IRS may ultimately result in an award
under that standard. Further, the definition reflects the requirement,
under Section 406 of the 2006 Act, that the IRS must analyze and investigate
information received under section 7623(b) by providing that the IRS
cannot, for purposes of paying an award under section 7623, proceed
based on information without taking some action beyond simply analyzing
or investigating the information. The definition provides that the
IRS proceeds based on the information provided only when the IRS initiates
a new action that it would not have initiated, expands the scope of
an ongoing action that it would not have expanded, or continues to
pursue an ongoing action that it would not have continued but for
the information provided.

The definition of the term related action contained in these proposed regulations clarifies which actions
may be included for purposes of computing collected proceeds by requiring
a clear link between the original action and the other, related action(s).
To enable the IRS to administer the award program and to strike an
appropriate balance between the individual’s substantial contribution
and the IRS’s independent administration of the tax laws, this
clear link requires: (i) a direct relationship between the person
identified in the information provided and subject to the original
action and the person(s) subject to the other action(s); and (ii)
a substantial similarity between the specific facts contained in the
information provided and the relevant facts of the other action(s).
Consistent with the statutory language, this conjunctive test excludes
from the definition of related action actions that are merely factually
similar to the original action, for example, actions against unidentified
taxpayers that merely engaged in substantially similar transactions
to the transaction identified in the information provided. The direct
relationship test of the definition’s first prong amounts to
a one-step rule: the taxpayer subject to the related action can be
no more than one step removed — in terms of identification by
the IRS — from a taxpayer identified in the information provided.
For example, under the proposed rules, if the information provided
identifies a party to a transaction and the facts relevant to the
transaction, then an action against an unidentified individual or
firm that promoted the identified person’s participation in
the transaction may be a related action. An action against another
client of the unidentified promoter, however, is not a related action,
regardless of whether the other client engaged in a substantially
similar transaction or whether the information provided could be said
to have initiated events that led to all the actions. Similarly,
if the information provided identifies a party to a particular transaction
and the facts relevant to the transaction, then an action against
a second, unidentified party to the same transaction may be a related
action. An action against another unidentified person that promoted
only the second, unidentified party’s participation in the transaction,
however, is not a related action.

The definition of collected proceeds contained
in these proposed regulations builds on the definition contained in
the final regulations published on February 22, 2012 (TD 9580). The
definition restates the rule from those final regulations that collected
proceeds include: tax, penalties, interest, additions to tax, and
additional amounts collected because of the information provided;
amounts collected prior to receipt of the information provided if
the information results in the denial of a claim for refund that otherwise
would have been paid; and a reduction of an overpayment credit balance
used to satisfy a tax liability incurred because of the information
provided.

Based on the IRS’s experience in administering the award
program since the issuance of the final regulations and on stakeholder
input on those regulations, the proposed regulations’ definition
of collected proceeds also addresses refund netting and the treatment
of tax attributes generally, which include net operating losses (NOLs).
The proposed regulations provide that if any portion of a claim for
refund that is substantively unrelated to the information provided
is (1) allowed and (2) used to satisfy a tax liability attributable
to the information provided instead of refunded to the taxpayer, then
the allowed but non-refunded amount constitutes collected proceeds.
As to the treatment of tax attributes such as NOLs, the proposed
regulations provide a computational rule that reflects the discussion
contained in the preamble to T.D. 9580. There, Treasury and the IRS
noted that tax attributes such as NOLs do not represent amounts credited
to the taxpayer’s account that are directly available to satisfy
current or future tax liabilities or that can be refunded. Rather,
tax attributes such as NOLs are component elements of a taxpayer’s
liability. The disallowance of an NOL claimed by a taxpayer may affect
the taxpayer’s liability and, in the context of a whistleblower
claim, may result in collected proceeds.

To enable the IRS to administer the award program, the proposed
regulations’ computational rule provides that, after there has
been a final determination of tax, the IRS will compute the amount
of collected proceeds taking into account all information known with
respect to the taxpayer’s account (including all tax attributes
such as NOLs). For example: a taxpayer reports an NOL of $10 million
for 2009 and a whistleblower’s information results in a reduction
of the NOL to $5 million. If the NOL is unused as of the date the
IRS computes the amount of collected proceeds, then there are no collected
proceeds. If, however, the 2009 NOL was partially carried back to
2008, initially generating a $3 million refund, and the whistleblower’s
information reduced the carryback amount, resulting in a $1.5 million
reduction in the refund for 2008, then the amount of the erroneous
refund recovered and collected would be collected proceeds. The proposed
regulations’ definition of collected proceeds, therefore, does
not refer explicitly to NOLs, tax credits, or any other tax attributes
that may factor into the computation of a taxpayer’s liability.
Furthermore, the proposed regulations’ computational rule does
not attempt to assign a present value to these attributes, given that
whether, when, or to what extent they may affect a taxpayer’s
liability or the amount of collected proceeds cannot be determined
in advance of their actual use. Nor does the computational rule require
the IRS to continue tracking these taxpayers, who may not be under
examination, and attributes into future years, given the significant
costs and heavy administrative burden that would be required.

Consistent with provisions in the IRM, these proposed regulations
provide that amounts recovered under the provisions of non-Title 26
laws do not constitute collected proceeds, because the plain language
of section 7623 authorizes awards for detecting “underpayments
of tax” and violations of the internal revenue laws. The internal
revenue laws are contained in Title 26, Internal Revenue Code and
guidance issued under that title. Although the IRS may collect penalties
for violations of Title 31, Money and Finance, and seize property
under Title 18, Crimes and Criminal Procedure, those penalties and
seizures do not relate to “underpayments of tax,” may
be imposed independently of whether a tax underpayment occurs, and
are not related to violations of the internal revenue laws under Title
26. For example, the IRS may collect penalties for failure to file
Form 90-22.1, “Report of Foreign Bank and Financial
Accounts” (FBAR), which is an information reporting
requirement under Title 31 the violation of which does not necessarily
result in an underpayment of tax. As a result, FBAR penalties do
not constitute collected proceeds. Moreover, sections 5323(a) and
9703(a) of Title 31 provide independent authority, separate and apart
from section 7623, for the payment of rewards for information relating
to certain violations of Title 31 or Title 18.

These proposed regulations also provide that criminal fines
that must be deposited into the Victims of Crime Fund do not constitute
collected proceeds. Under the Victims of Crimes Act of 1984, criminal
fines that are imposed on a defendant by a district court are deposited
into the Victims of Crime Fund. See 42 U.S.C. §10601(b)(1).
Criminal fines imposed for Title 26 offenses are not exempt from
this requirement. The fines imposed in criminal tax cases that are
deposited into the Victims of Crime Fund are not available to the
Secretary to pay awards under section 7623. These exclusions were
previously explained in the preamble to T.D. 9580 and are further
clarified in the text of these proposed regulations. Restitution
ordered by a court to the IRS, however, is collected by the IRS as
a tax and, therefore, is encompassed in the definition of collected
proceeds.

Finally, these proposed regulations provide a rule for determining
collected proceeds in cases in which the IRS does not collect the
full amount of the assessed liabilities. Pursuant to this rule, collected
proceeds, for purposes of paying an award under section 7623, are
determined on a pro rata basis based on the ratio that adjustments
attributable to the information provided bear against the total adjustments.

(2) Whether and how the IRS could determine any amount of collected
proceeds that arise as a result of a taxpayer’s use of tax attributes
such as NOLs after the final determination of tax and the computation
of collected proceeds, as provided in the proposed regulations.

Whistleblower Administrative Proceedings

Section 301.7623-3 of these proposed regulations describes the
administrative proceedings applicable to claims for award under both
section 7623(a) and section 7623(b). For purposes of applying these
procedures, the IRS may rely on the claimant’s description of
the amount owed by the taxpayer(s). The IRS may, however, rely on
other information as necessary (for example, when the alleged amount
in dispute is below the $2 million threshold of section 7623(b)(5)(B),
but the actual amount in dispute is above the threshold).

Administrative proceedings for awards paid under
section 7623(a)

In cases under section 7623(a), these proposed regulations provide
that the Whistleblower Office will send a preliminary award recommendation
letter to the claimant. Sending this letter marks the beginning of
the whistleblower administrative proceeding. The claimant will then
have 30 days within which to provide comments to the Whistleblower
Office. This approach is intended to provide claimants under section
7623(a) with an opportunity to participate in the award process, both
to add transparency to the proceeding and to assist the Whistleblower
Office in considering all potentially-relevant information in paying
awards under section 7623(a), even though those awards are not subject
to Tax Court review.

Administrative proceedings for awards paid under
section 7623(b)

In cases in which the Whistleblower Office will determine an
award under section 7623(b), the whistleblower administrative proceeding
more closely resembles the whistleblower award determination administrative
proceeding contained in the IRM, which only applies to awards determined
under section 7623(b). In an effort to both streamline the process
and provide information to whistleblowers as early as allowable under
section 6103, however, the proposed regulations move the beginning
of the proceeding forward. Under the proposed regulations, the whistleblower
administrative proceeding begins when the Whistleblower Office sends
out the preliminary award recommendation letter. Accordingly, whistleblowers
may receive opportunities to participate in the award determination
process at the administrative level even before there is a final determination
of tax in the underlying taxpayer action. These opportunities will
be provided in connection with all awards paid under section 7623(b),
and they are in addition to opportunities a whistleblower may be afforded
to assist the IRS in connection with the underlying taxpayer action,
for example pursuant to §§301.6103(n)-2 and 301.7623-1(d)
of the proposed regulations.

The Treasury and the IRS emphasize, however, that the proposed
regulations do not and cannot move forward a whistleblower’s
opportunity to appeal an award determination to Tax Court. Under
the proposed regulations, the Whistleblower Office will issue an appealable
determination or make payment, if a whistleblower has waived the determination,
as soon as possible after there has been a final determination of
tax (that is, the statutory period for the taxpayer to claim a refund
has expired or the underlying taxpayer action is otherwise final).

The whistleblower administrative proceeding generally consists
of four steps: (i) a preliminary award recommendation; (ii) a detailed
award report; (iii) an opportunity to review documents supporting
the preliminary award recommendation; and (iv) an award determination.
Under the proposed regulations, the first three steps may occur before
the final determination of tax in the underlying taxpayer matter.
Given that the amount of collected proceeds is not finally determined
until after the final determination of tax, however, the preliminary
award recommendation and the detailed award report, as well as the
documents made available for inspection, will reflect a tentative
or preliminary computation of the amount of collected proceeds.

The whistleblower administrative proceeding is intended to foster
a transparent administrative process, to ensure that claimants have
a meaningful opportunity to participate in the determination process
at the administrative level, to enable the Whistleblower Office to
make award determinations based on complete information, and to ensure
a fully-documented record on appeal to the Tax Court. The proposed
regulations permit claimants to participate in the whistleblower administrative
proceeding through a structured process involving correspondence and
other communications with the Whistleblower Office. Claimants are
afforded opportunities to review the Whistleblower Office’s
preliminary award recommendation, to provide additional information
regarding their claims that is relevant to an award determination,
and to submit comments challenging all aspects of the preliminary
findings at the administrative level. The Treasury and the IRS recognize
that, in some cases, claimants may be able to provide information
during the whistleblower administrative proceeding that could be critical
to the award determination but that is not already contained in the
administrative claim file. For example, a claimant may be able to
demonstrate that a determination is based on a misapplication of the
lower award percentages of section 7623(b)(2) by providing information
that demonstrates that the claimant was the original source of public
source information.

The Treasury and the IRS recognize that, while detailed administrative
claim files assist the Whistleblower Office in making fair and accurate
award determinations, steps should be taken to prevent potential redisclosure
or misuse of the taxpayer’s confidential return information
contained in those files. Section 6103(h)(4) and §301.6103(h)(4)-1
of the proposed regulations authorize the disclosures made by the
Whistleblower Office in the course of the whistleblower administrative
proceeding, but they provide neither redisclosure prohibitions nor
penalties. Accordingly, the proposed regulations require claimants
to execute confidentiality agreements before they may receive a detailed
description of the factors that contributed to the preliminary award
recommendation or view documents that support the recommendation.
A claimant is not required to execute a confidentiality agreement
before appealing an award determination to the Tax Court, and executing
an agreement does not prevent a claimant from seeking Tax Court review.
Moreover, a claimant’s execution of a confidentiality agreement
would not preclude the claimant from providing to Congress certain
information about the preliminary award recommendation, but it would
preclude the claimant from providing to Congress information disclosed
to the claimant after the execution of the agreement and during the
whistleblower administrative proceeding. Section 6103(f), however,
provides a general framework for Congress to access taxpayer return
information, and this general framework may also be used in connection
with whistleblower award claims.

The proposed regulations provide that the Whistleblower Office,
in determining the award percentage, may treat a claimant’s
violation of the terms of the confidentiality agreement as a negative
factor and, thus, as a basis for reducing the amount of an award.
Further, while the proposed regulations provide claimants with an
opportunity to view information in the administrative claim file that
is not protected from disclosure by one or more common law or statutory
privileges, the proposed regulations provide rules intended to safeguard
the disclosure of information to a claimant (for example, supervised
document review and no photocopying of documents).

Administrative proceedings for denials of awards
under section 7623(b)

Finally, the proposed regulations provide that in cases in which
the Whistleblower Office will reject a claim under section 7623(b),
pursuant to §301.7623-1(b) or (c), or will deny a claim under
section 7623(b), either because the IRS did not proceed with an action
based on the information provided or because the IRS did not collect
proceeds, the Whistleblower Office will send a preliminary denial
letter to the claimant. Sending this letter marks the beginning of
the whistleblower administrative proceeding. This notice will be
provided as promptly as possible under the particular circumstances
of a given case. The claimant will then have 30 days within which
to provide comments to the Whistleblower Office. Again, this approach
is intended to foster a transparent and accurate review process.
Given the large administrative burden involved, however, the proposed
regulations do not provide preliminary notice and comment procedures
applicable to denials of claims for award under section 7623(a).

Comments are specifically requested on:

(1) Whether claimants should be afforded additional opportunities
to participate in whistleblower administrative proceedings, and if
so, what additional opportunities would be beneficial to the Whistleblower
Office and to claimants and why.

(2) Whether additional safeguards should be adopted to further
protect taxpayer return information disclosed in the course of whistleblower
administrative proceedings and, if so, what safeguards would be effective
and appropriate.

(3) Whether starting a whistleblower administrative proceeding
before a final determination of tax in the underlying taxpayer action
provides a meaningful benefit for whistleblowers.

Determining the Amount of Awards and Paying Awards

Section 301.7623-4 of these proposed regulations provides the
framework and criteria that the Whistleblower Office will use in exercising
the discretion granted under section 7623 to make awards. The proposed
regulations are consistent with, and build on, the award determination
provisions provided in the IRM. The rules of this section are proposed
to apply to claims for awards under both section 7623(a) and section
7623(b).

Generally, the proposed regulations adopt a fixed percentage
approach pursuant to which the Whistleblower Office will assign claims
for award to one of a number of fixed percentages within the applicable
award percentage range. The fixed percentage approach provides a
structure that will promote consistency in the award determination
process by enabling the Whistleblower Office to determine awards across
the breadth of the applicable percentage range based on meaningful
distinctions among cases. In general, the Whistleblower Office will
determine awards at the uppermost end of the applicable percentage
range, for example, 30 percent of collected proceeds under section
7623(b)(1), only in extraordinary cases. The fixed percentage approach
avoids having to draw fine distinctions that might seem unfair and
arbitrary, given the differences among claims for award with respect
to both the facts and law of the underlying actions and the nature
and extent of the substantial contribution of the claimants.

Under these proposed regulations, the Whistleblower Office generally
will assign the fixed percentages to claims for award by evaluating
the substantial contribution of the claimant to the underlying action(s)
based on the Whistleblower Office’s review of the entire administrative
claim file and the application of the positive factors and negative
factors, listed in §301.7623-4(b), to the facts. After the application
of the positive and negative factors has been completed, the Whistleblower
Office will review the planning and initiating factors, if applicable.
The purpose of this criteria-based approach is to also promote consistency
in the award determination process. In addition, this approach is
intended to provide transparency in the process, and the publication
of the criteria should provide helpful guidance to claimants when
submitting their claims and in understanding the basis for award determinations.
For claims involving multiple actions (regardless of the number of
taxpayers involved), the proposed regulations enable the Whistleblower
Office to determine and apply separate award percentages on an action-by-action
basis in appropriate cases. The Treasury and the IRS recognize that
a multiple-action determination may result in a lengthier award process,
but it may be necessary in some cases.

Section 7623(b)(3) provides for an appropriate reduction of
awards to claimants who planned and initiated the actions that led
to the underpayment of tax or actions described in section 7623(a)(2)
(the underlying acts). Section 7623(b)(3), unlike section 7623(b)(1)
and section 7623(b)(2), provides no direction to the Whistleblower
Office on what to consider in exercising this grant of discretion.
Accordingly, the proposed regulations provide slightly more flexibility
to determine the amount of an appropriate reduction under this section
than they provide under the respective frameworks for determining
awards for substantial and less substantial contributions.

Under the proposed regulations, the Whistleblower Office will
make a threshold determination of whether a claimant planned and initiated
the underlying acts, but this determination will not result in an
automatic or fixed reduction of the award percentage or award amount.
A claimant will only satisfy the threshold determination if the claimant
(i) designed, structured, drafted, arranged, formed the plan leading
to, or otherwise planned an underlying act, (ii) took steps to start,
introduce, originate, set into motion, promote or otherwise initiated
an underlying act, and (iii) knew or had reason to know that there
were tax implications to planning and initiating the underlying act.

If the Whistleblower Office determines that a claimant meets
the threshold for planning and initiating, the Whistleblower Office
will then categorize and evaluate the extent of the claimant’s
planning and initiating of the underlying acts, based on the application
of factors listed in §301.7623-4(c)(3)(iv) to the facts contained
in the administrative claim file, to determine the amount of the appropriate
reduction, if any. The proposed regulations’ use of the categories
primary, significant, and moderate, like the use of the fixed percentage
and criteria approach for determining awards in substantial contribution
and less substantial contribution cases, is intended to promote consistency,
fairness, and transparency in an award determination process that
is inherently subjective.

The proposed regulations do not adopt a “principal architect”
approach to the application of section 7623(b)(3), based in part on
the plain language of the statutory provision, which does not require
a single planner. More than one individual may plan and initiate
the actions that lead to a tax underpayment or violation. The Treasury
and the IRS recognize the value that all whistleblowers may provide,
and the proposed regulations balance the goal of incentivizing whistleblowers
with the plain language of the statute by providing for a sliding
scale of reductions to an award for planning and initiating.

The proposed regulations provide rules for determining awards
when two or more independent claims, based on different information,
relate to the same collected proceeds. In these situations, the proposed
regulations allow the Whistleblower Office to determine multiple awards,
limited in aggregate amount to the maximum amount that could have
been awarded to a single claimant, rather than restricting the determination
to a single award payable to the first individual that files a claim
for award or payable on some other basis.

The proposed regulations also provide rules for determining
whether affiliated claimants are eligible for awards and, if so, for
determining the amount of the awards. The rule covering eligible
affiliated claimants is intended to apply when the Whistleblower Office
determines that an eligible individual is attempting to avoid a reduced
award, for example, based on the application of the rules of section
7623(b)(3) or the application of negative factors, by having another
individual to whom those rules would otherwise not apply submit the
claim on behalf of the eligible individual. This rule allows the
Whistleblower Office to put the actual claimant in the shoes of the
purported claimant for purposes of determining the amount of the award.

Comments are specifically requested on:

(1) The efficacy of the fixed percentage approach provided under
these proposed regulations.

(2) Whether there are additional positive factors, negative
factors, or planning and initiating factors that would be useful for
the Whistleblower Office to consider in determining the amount of
awards under these regulations.

(3) The threshold determination of whether a whistleblower planned
and initiatedan underlying act.

(4) Whether the IRS should determine and pay multiple awards
in cases in which two or more independent claims relate to the same
collected proceeds, as provided under the proposed regulations, or
whether only the first individual to provide information or submit
a claim relating to particular collected proceeds should receive an
award.

(5) The application of the eligible affiliated claimant rule.

Information Disclosures in Whistleblower Administrative
Proceedings

Section 6103(h)(4) authorizes the disclosure of returns and
return information in administrative or judicial proceedings pertaining
to tax administration in certain circumstances. This rule provides
the authority to disclose return information for purposes of a whistleblower
administrative proceeding under section 7623. Section 301.6103(h)(4)-1
of these proposed regulations specifically authorizes the Director,
officers, and employees of the Whistleblower Office to disclose return
information to the extent necessary to conduct whistleblower administrative
proceedings. To minimize the potentially adverse consequences of
the disclosure, and possible redisclosure, of return information,
these proposed regulations provide that the Whistleblower Office will
use confidentiality agreements in section 7623(b) whistleblower award
determination administrative proceedings, as well as other safeguards,
to minimize possible redisclosures of return information while still
providing meaningful opportunities for claimants to participate in
whistleblower administrative proceedings.

Comments are specifically requested on whether the proposed
regulations strike an appropriate balance between minimizing possible
redisclosures of confidential return information and providing meaningful
opportunities for claimants to participate in the administrative processing
of their claims.

Proposed Effective Dates

When finalized, §§301.7623-1, 301.7623-2, 301.7623-3,
and 301.6103(h)(4)-1 are proposed to apply to information submitted
on or after the date these rules are adopted as final regulations
in the Federal Register, and to claims
for award under sections 7623(a) and 7623(b) that are open as of that
date. Likewise, §301.7623-4 is proposed to apply to information
submitted on or after that date, and to claims for award under section
7623(b) that are open as of that date. Section 301.7623-4 is not
proposed to apply to claims for award under section 7623(a) that are
open as of that date. This exception is intended to allow the IRS
to continue to apply consistent rules to open claims for award under
the discretionary award program of section 7623(a).

Comments are specifically requested on whether the proposed
effective dates are appropriate.

Special Analyses

It has been determined that these proposed rules are not a significant
regulatory action as defined in Executive Order 12866, as supplemented
by Executive Order 13563. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because the regulations do not impose a collection
of information on small entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, these regulations have been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on their
impact on small businesses.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments
(a signed original and eight (8) copies) that are submitted timely
to the IRS. The Treasury and the IRS request comments on all aspects
of the proposed regulations. All comments that are submitted by the
public will be available for public inspection and copying at www.regulations.gov or upon request. A public hearing
may be scheduled if requested in writing by a person who timely submits
written comments. If a public hearing is scheduled, notice of the
date, time, and place of the hearing will be published in the Federal Register.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended
by adding entries in numerical order to read in part as follows:

(a) In general. A whistleblower administrative
proceeding (as described in §301.7623-3) is an administrative
proceeding pertaining to tax administration within the meaning of
section 6103(h)(4).

(b) Disclosures in whistleblower administrative proceedings. Pursuant to section 6103(h)(4) and paragraph (a) of this section,
the Director, officers, and employees of the Whistleblower Office
may disclose returns and return information (as defined by section
6103(b)) to an individual (or the individual’s legal representative,
if any) to the extent necessary to conduct a whistleblower administrative
proceeding (as described in § 301.7623-3), including but
not limited to—

(1) By communicating a preliminary award recommendation or preliminary
denial letter to the individual;

(2) By providing the individual with an award report package;

(3) By conducting a meeting with the individual to review documents
supporting the preliminary award recommendation; and

(c) Effective/applicability date. Section
301.6103(h)(4)-1 will be effective on the date of publication of the
Treasury decision adopting these rules as final regulations in the Federal Register. When finalized, this section
is proposed to apply with respect to whistleblower administrative
proceedings beginning on or after the date of publication of the Treasury
Decision adopting these rules as final regulations in the Federal Register.

Par. 3. Section 301.7623-1 is revised to read as follows:

§301.7623-1 General rules, submitting information
on underpayments of tax or violations of the internal revenue laws,
and filing claims for award.

(a) In general. In cases in which awards
are not otherwise provided for by law, the Whistleblower Office may
pay an award under section 7623(a), in a suitable amount, for information
necessary for detecting underpayments of tax or detecting and bringing
to trial and punishment persons guilty of violating the internal revenue
laws or conniving at the same. In cases that satisfy the requirements
of section 7623(b)(5) and (b)(6) and in which the Internal Revenue
Service (IRS) proceeds with an administrative or judicial action based
on information provided by an individual, the Whistleblower Office
must determine an award under section 7623(b)(1), (2), or (3). The
awards provided for by section 7623 and this paragraph must be paid
from collected proceeds, as defined in § 301.7623-2(d).

(b) Eligibility to file claim for award. (1) In general. Any individual, other than
an individual described in paragraph (b)(2) of this section, is eligible
to file a claim for award and to receive an award under section 7623
and §§ 301.7623-1 through 301.7623-4.

(2) Ineligible claimants. The Whistleblower
Office will reject any claim for award filed by an ineligible claimant
and will provide written notice of the rejection to the claimant.
The following individuals are not eligible to file a claim for award
or receive an award under section 7623 and §§ 301.7623-1
through 301.7623-4:

(i) An individual who is an employee of the Department of Treasury
or was an employee of the Department of Treasury when the individual
obtained the information on which the claim is based;

(ii) An individual who obtained the information through the
individual’s official duties as an employee of a Federal, State,
or local Government, or who is acting within the scope of those official
duties as an employee of a Federal, State, or local Government;

(iii) An individual who is or was required by Federal law or
regulation to disclose the information or who is or was precluded
by Federal law or regulation from disclosing the information;

(iv) An individual who obtained or was furnished the information
while acting in an official capacity as a member of a Federal or State
body or commission having access to materials such as Federal returns,
copies, or abstracts; or

(v) An individual who obtained or had access to the information
based on a contract with the Federal government.

(3) Ineligible affiliated claimants. If
the Whistleblower Office determines that an affiliated claimant, as
defined in § 301.7623-2(f), filed a claim for award based
on information obtained from an ineligible individual for the purpose
of avoiding the rejection of the claim that would result if the claim
was filed by the ineligible individual, then the Whistleblower Office
may treat the claim as if it had been filed by the ineligible individual.
See § 301.7623-4(c)(4) for rules regarding eligible affiliated
claimants.

(c) Submission of information and claims for award. (1) Submitting information. To be eligible
to receive an award under section 7623 and §§ 301.7623-1
through 301.7623-4, an individual must submit to the IRS specific
and credible information that the individual believes will lead to
collected proceeds from persons whom the individual believes have
failed to comply with the internal revenue laws. In general, an individual’s
submission should identify the person(s) believed to have failed to
comply with the internal revenue laws and should provide substantive
information, including all available documentation, that supports
the individual’s allegations. Information that identifies a
pass-through entity will be considered to also identify all persons
with a direct or indirect interest in the entity. Information that
identifies a member of a firm who promoted another identified person’s
participation in a transaction described and documented in the information
provided will be considered to also identify the firm and all other
members of the firm. Submissions that provide speculative information
or that do not provide specific and credible information regarding
tax underpayments or violations of internal revenue laws do not provide
a basis for an award. If documents or supporting evidence are known
to the individual but are not in the individual’s control, then
the individual should describe the documents or supporting evidence
and identify their location to the best of the individual’s
ability. If all available information known to the individual is
not provided to the IRS by the individual, then the individual bears
the risk that this information might not be considered by the Whistleblower
Office for purposes of an award.

(2) Filing claim for award. To claim an
award under section 7623 and §§ 301.7623-1 through
301.7623-4 for information provided to the IRS, an individual must
file a formal claim for award by completing and sending Form 211,
“Application for Award for Original Information,” to the Internal Revenue Service, Whistleblower Office, at
the address provided on the form, or by complying with other claim
filing procedures as may be prescribed by the IRS in other published
guidance. The Form 211 should be completed in its entirety and should
include the following information:

(i) The date of the claim;

(ii) The claimant’s name;

(iii) The claimant’s address and telephone number;

(iv) The date of birth of the claimant;

(v) The taxpayer identification number of the claimant; and

(vi) An explanation of how the information on which the claim
is based came to the attention and into the possession of the claimant,
including, as available, the date(s) on which the claimant acquired
the information and a complete description of the claimant’s
present or former relationship (if any) to the person(s) identified
on the Form 211.

(3) Under penalty of perjury. No award
may be made under section 7623(b) unless the information on which
the award is based is submitted to the IRS under penalty of perjury.
All claims for award under section 7623 and §§ 301.7623-1
through 301.7623-4 must be accompanied by an original signed declaration
under penalty of perjury, as follows: “I declare under penalty
of perjury that I have examined this application, my accompanying
statement, and supporting documentation and aver that such application
is true, correct, and complete, to the best of my knowledge.”
This requirement precludes the filing of a claim for award by a person
serving as a representative of, or in any way on behalf of, another
individual. Claims filed by more than one individual (joint claims)
must be signed by each individual claimant under penalty of perjury.

(4) Perfecting claim for award. If an
individual files a claim for award that does not include information
described under paragraph (c)(2) of this section, does not contain
specific and credible information as described in paragraph (c)(1)
of this section, or is based on information that was not submitted
under penalty of perjury as required by paragraph (c)(3) of this section,
the Whistleblower Office may, in its sole discretion, reject the claim
or notify the individual of the deficiencies and provide the individual
an opportunity to perfect the claim for award. If an individual does
not perfect the claim for award within the time period specified by
the Whistleblower Office, then the Whistleblower Office may reject
the claim. If the Whistleblower Office rejects a claim, then the
Whistleblower Office will provide written notice of the rejection
to the claimant. If the Whistleblower Office rejects a claim for
the reasons described in this paragraph, then the claimant may perfect
and resubmit the claim.

(d) Request for assistance. (1) In general. The Whistleblower Office, the IRS or IRS
Office of Chief Counsel may request the assistance of an individual
claimant or the individual claimant’s legal representative.
Any assistance shall be at the direction and control of the Whistleblower
Office, the IRS, or the IRS Office of Chief Counsel assigned to the
matter. See § 301.6103(n)-2 for rules regarding written
contracts among the IRS, whistleblowers, and legal representatives
of whistleblowers.

(2) No agency relationship. Submitting
information, filing a claim for award, or responding to a request
for assistance does not create an agency relationship between a claimant
and the Federal government, nor does a claimant or the claimant’s
legal representative act in any way on behalf of the Federal government.

(e) Identification of whistleblowers.
Under the informant’s privilege, the IRS will use its best efforts
to protect the identity of whistleblowers. In some circumstances,
the IRS may need to reveal a whistleblower’s identity, for example,
when it is determined that it is in the best interests of the Government
to use a whistleblower as a witness in a judicial proceeding. In
those circumstances, the IRS will make every effort to notify the
whistleblower before revealing the whistleblower’s identity.

(f) Effective/applicability date. When
finalized, § 301.7623-1 is proposed to apply to information
submitted on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the FederalRegister and
to claims for award under sections 7623(a) and 7623(b) that are open
as of the date of publication of the Treasury decision adopting these
rules as final regulations in the FederalRegister.

Par. 4. Section 301.7623-2 is added to read as follows:

§301.7623-2 Definitions.

(a) Action. (1) In general. For purposes of section 7623(b) and §§ 301.7623-1
through 301.7623-4, the term action means an
administrative or judicial action.

(2) Administrative action. For purposes
of section 7623(b) and §§ 301.7623-1 through 301.7623-4,
the term administrative action means all or a
portion of an Internal Revenue Service (IRS) civil or criminal proceeding
against any person that may result in collected proceeds, as defined
in paragraph (d) of this section, including, for example, an examination,
a collection proceeding, a status determination proceeding, or a criminal
investigation.

(3) Judicial action. For purposes of section
7623(b) and §§ 301.7623-1 through 301.7623-4, the term judicial action means all or a portion of a proceeding
against any person in any court that may result in collected proceeds,
as defined in paragraph (d) of this section.

(b) Proceeds based on. (1) In
general. For purposes of section 7623(b) and §§301.7623-1
through 301.7623-4, IRS proceeds based on information
provided by an individual only when the IRS:

(i) Initiates a new action;

(ii) Expands the scope of an ongoing action; or

(iii) Continues to pursue an ongoing action, that the IRS would
not have initiated, expanded the scope of, or continued to pursue,
respectively, but for the information provided by the individual.
The IRS does not proceed based on when the IRS merely analyzes the
information provided by the individual and investigates the matter.

(2) Example. The provisions of paragraph
(b)(1) of this section may be illustrated by the following example:

Example. Information provided to the IRS
by an individual, under section 7623 and §301.7623-1, identifies
a taxpayer, describes and documents specific facts relating to the
taxpayer’s foreign sales in Country A, and, based on those facts,
alleges that the taxpayer was not entitled to a foreign tax credit
relating to its foreign sales in Country A. The IRS receives the
information after having already initiated an examination of the taxpayer.
The IRS’s audit plan does not include consideration of the
amount of the foreign tax credit relating to the taxpayer’s
foreign sales in Country A but, based on the information provided,
the IRS expands the examination to include the foreign tax credit
issue. For purposes of section 7623 and §§301.7623-1 through
301.7623-4, the portion of the IRS’s examination of the taxpayer
relating to the foreign tax credit issue is an administrative action
with which the IRS proceeds based on the information provided by the
individual. If the examination of the taxpayer included the foreign
tax credit issue before the individual provided the information, then
no portion of the IRS’s examination of the taxpayer is an administrative
action with which the IRS proceeds based on the information provided,
unless the IRS would not have continued to pursue the examination
but for the information provided.

(c) Related action. (1) In general. For purposes of section 7623(b) and §§ 301.7623-1
through 301.7623-4, the term related action is
limited to:

(i) A second or subsequent action against the person(s) identified
in the information provided and subject to the original action if,
in the second or subsequent action, the IRS proceeds based on the
specific facts described and documented in the information provided;
and

(ii) An action against a person other than the person(s) identified
in the information provided and subject to the original action if:

(A) The other, unidentified person is directly related to the
person identified in the information provided;

(B) The facts relating to the underpayment of tax or violations
of the internal revenue laws by the other person are substantially
the same as the facts described and documented in the information
provided (with respect to the person(s) subject to the original action);
and

(C) The IRS proceeds with the action against the other person
based on the specific facts described and documented in the information
provided. For purposes of this paragraph, an unidentified person
is directly related to the person identified in the information provided
if the IRS can identify the unidentified person using only the information
provided (without first having to use the information provided to
identify any other person or having to independently obtain additional
information).

(2) Examples. The provisions of paragraph
(c)(1) of this section may be illustrated by the following examples:

Example 1. Information provided to the
IRS by an individual, under section 7623 and §301.7623-1, identifies
a taxpayer, describes and documents specific facts relating to the
taxpayer’s activities, and, based on those facts, alleges that
the taxpayer owed additional taxes in Year 1. The IRS proceeds with
an examination of the taxpayer for Year 1 based on the information
provided by the individual. The IRS discovers that the taxpayer engaged
in the same activities in Year 2 and expands the examination to Year
2. In the course of the examination, the IRS obtains, through the
issuance of IDRs and summonses, additional facts that are unrelated
to the activities described in the information provided by the individual.
Based on these additional facts, the IRS expands the scope of the
examination of the taxpayer for both Year 1 and Year 2. For purposes
of section 7623 and §§301.7623-1 through 301.7623-4, the
portion of the IRS’s examination of the taxpayer in Year 2 relating
to the activities described and documented in the information provided
(with respect to Year 1) is a related action because it satisfies
the conditions of paragraph (c)(1)(i) of this section. The portions
of the IRS’s examination of the taxpayer in both Year 1 and
Year 2 relating to the additional facts obtained through the issuance
of IDRs and summonses are not related actions (nor are they administrative
actions based on the information provided).

Example 2. Information provided to the
IRS by an individual, under section 7623 and §301.7623-1, identifies
a taxpayer (Taxpayer 1), describes and documents specific facts relating
to Taxpayer 1’s activities, and, based on those facts, alleges
tax underpayments by Taxpayer 1. The information provided also identifies
an accountant (CPA 1) and describes and documents specific facts relating
to CPA 1’s contribution to the activities of Taxpayer 1 that
the individual alleges resulted in tax underpayments. The IRS proceeds
with an examination of Taxpayer 1 based on the information provided
by the individual. Using only the information provided, the IRS obtains
CPA 1’s client list and identifies two taxpayer/clients of CPA
1 (Taxpayer 2 and Taxpayer 3) that appear to have engaged in activities
similar to Taxpayer 1. The IRS proceeds with an examination of Taxpayer
2 and finds that Taxpayer 2 engaged in the same activities as those
described in the information provided with respect to Taxpayer 1.
The IRS proceeds with an examination of Taxpayer 3 and finds that
Taxpayer 3 engaged in different activities from those described in
the information provided with respect to Taxpayer 1. For purposes
of section 7623 and §§301.7623-1 through 301.7623-4, the
examination of Taxpayer 2 is a related action because it satisfies
the conditions of paragraph (c)(1)(ii) of this section. The examination
of Taxpayer 3 is not a related action because the relevant facts are
not substantially the same as the facts relevant to the examination
of Taxpayer 1.

Example 3. Same facts as Example
2. Using only the information provided, the IRS identifies
a co-promoter of CPA 1 (CPA 2) that appears to have engaged in activities
similar to CPA 1. CPA 2 is not a member of CPA 1’s firm. The
IRS subsequently obtains the client list of CPA 2 and identifies a
taxpayer/client of CPA 2 (Taxpayer 4) that appears to have engaged
in activities similar to Taxpayer 1. The IRS proceeds with an examination
of Taxpayer 4 and finds that Taxpayer 4 engaged in the same activities
as those described in the information provided with respect to Taxpayer
1, and that CPA 2 contributed to the activities in the same way as
described in the information provided with respect to CPA 1. The
IRS proceeds with an examination of CPA 2’s liability for promoter
penalties under section 6700 in connection with the activities described
in the information provided with respect to Taxpayer 1 and CPA 1.
For purposes of section 7623 and §§301.7623-1 through 301.7623-4,
the examination of CPA 2 is a related action because it satisfies
the conditions of paragraph (c)(1)(ii) of this section. The examination
of Taxpayer 4 is not a related action because Taxpayer 4 was not related
to a person identified in the information provided. CPA 2 was not
identified in the information provided and the IRS first had to identify
CPA 2 before identifying Taxpayer 4 and proceeding with the examination
of Taxpayer 4.

Example 4. Same facts as Example
2. An accountant (CPA 3) is a member of CPA 1’s
firm. Using only the information provided, the IRS obtains the client
list of CPA 3 and identifies a taxpayer/client of CPA 3 (Taxpayer
5) that appears to have engaged in activities similar to Taxpayer
1. The IRS proceeds with an examination of Taxpayer 5 and finds that
Taxpayer 5 engaged in the same activities as those described in the
information provided with respect to Taxpayer 1, and that CPA 3 contributed
to the activities in the same way as described in the information
provided with respect to CPA 1. For purposes of section 7623 and
§§301.7623-1 through 301.7623-4, the examination of Taxpayer
5 is a related action because Taxpayer 5 is related to CPA 3, a person
considered to be identified in the information provided under §301.7623-1(c)(1),
and the facts relating to Taxpayer 5 are substantially the same as
the facts described and documented in the information provided. An
IRS examination of CPA 3’s liability for promoter penalties
under section 6700, based on the facts described and documented in
the information provided with respect to Taxpayer 1 and CPA 1, is
an administrative action based on the information provided.

Example 5. Information provided to the
IRS by an individual, under section 7623 and §301.7623-1, identifies
a taxpayer (Taxpayer 1), describes and documents specific facts relating
to Taxpayer 1’s activities, and, in particular, Taxpayer 1’s
participation in a transaction. Based on those facts, the individual
alleges that Taxpayer 1 owed additional taxes. The IRS proceeds with
an examination of Taxpayer 1 based on the information provided by
the individual. The IRS identifies the other parties to the transaction
described in the information provided (Taxpayer 2 and Taxpayer 3).
The IRS proceeds with examinations of Taxpayer 2 and Taxpayer 3 relating
to their participation in the transaction described in the information
provided. For purposes of section 7623 and §§ 301.7623-1
through 301.7623-4, the IRS’s examinations of Taxpayer 2 and
Taxpayer 3 relating to the activities described and documented in
the information provided are related actions because they satisfy
the conditions of paragraph (c)(1)(ii) of this section.

(d) Collected proceeds. (1) In general. For purposes of section 7623 and §§301.7623-1
through 301.7623-4, the terms proceeds of amounts collected and collected proceeds (collectively, collected proceeds) include: tax, penalties, interest,
additions to tax, and additional amounts collected because of the
information provided; amounts collected prior to receipt of the information
if the information provided results in the denial of a claim for refund
that otherwise would have been paid; and a reduction of an overpayment
credit balance used to satisfy a tax liability incurred because of
the information provided. Collected proceeds are limited to amounts
collected under the provisions of title 26, United States Code.

(2) Refund netting. (i) In general. If any portion of a claim for refund that is substantively unrelated
to the information provided is:

(A) Allowed, and

(B) Used to satisfy a tax liability attributable to the information
provided instead of refunded to the taxpayer, then the allowed but
non-refunded amount constitutes collected proceeds.

(ii) Example. The provisions of paragraph
(d)(2)(i) of this section may be illustrated by the following example:

Example. Information provided to the IRS
by an individual, under section 7623 and § 301.7623-1, identifies
a corporate taxpayer (Corporation), describes and documents specific
facts relating to Corporation’s activities, and, based on those
facts, alleges that Corporation owed additional taxes. Based on the
information provided by the individual, the IRS proceeds with an examination
of Corporation and determines adjustments that would result in an
unpaid tax liability of $500,000. During the examination, Corporation
informally claims a refund of $400,000 based on adjustments to items
of income and expense that are wholly unrelated to the information
provided by the individual. The IRS agrees to the unrelated adjustments.
The IRS nets the adjustments and determines a tax deficiency of $100,000.
Thereafter, Corporation makes full payment of the $100,000 deficiency.
For purposes of section 7623 and §§301.7623-1 through 301.7623-4,
the collected proceeds include the $400,000 informally claimed as
a refund and netted against the adjustments attributable to the information
provided, as well as the $100,000 paid by Corporation.

(3) Criminal fines. Criminal fines deposited
into the Victims of Crime Fund are not collected proceeds and cannot
be used for payment of awards.

(4) Computation of collected proceeds.
(i) In general. The Whistleblower Office will
monitor each case for collection of proceeds. Pursuant to § 301.7623-4(d)(1),
the IRS cannot make an award payment until there has been a final
determination of tax. For purposes of determining the amount of an
award under section 7623 and §§ 301.7623-1 through
301.7623-4, after there has been a final determination of tax as defined
in §301.7623-4(d)(2), the IRS will compute the amount of collected
proceeds based on all information known with respect to the taxpayer’s
account, including with respect to all tax attributes, as of the date
the computation is made.

(ii) Partial collection. If the IRS does
not collect the full amount of taxes, penalties, interest, additions
to tax, and additional amounts assessed against the taxpayer, then
any amounts that the IRS does collect will constitute collected proceeds
in the same proportion that the adjustments attributable to the information
provided bear to the total adjustments.

(e) Amount in dispute and gross income.
(1) In general. Section 7623(b) applies with
respect to any action against any taxpayer in which the tax, penalties,
interest, additions to tax, and additional amounts in dispute exceed
$2,000,000 but, if the taxpayer is an individual, then only if the
individual’s gross income exceeds $200,000 in at least one taxable
year subject to the action.

(2) Amount in dispute. (i) In
general. For purposes of section 7623(b)(5) and §§ 301.7623-1
through 301.7623-4, the term amount in dispute means the maximum total of tax, penalties, interest, additions to
tax, and additional amounts that could have resulted from the action(s)
with which the IRS proceeded based on the information provided, if
the formal positions taken by the IRS had been sustained. The IRS
will compute the amount in dispute, for purposes of award determinations
described in § 301.7623-3(c)(6), when there has been a
final determination of tax as defined in § 301.7623-4(d)(2).

(ii) Example. The provisions of paragraph
(e)(2)(i) of this section may be illustrated by the following example:

Example. Information provided to the IRS
by an individual, under section 7623 and § 301.7623-1, identifies
a corporate taxpayer, describes and documents specific facts relating
to the taxpayer’s activities, and, based on those facts, alleges
that the taxpayer owed additional taxes. The IRS proceeds with an
examination of the taxpayer based on the information provided by the
individual; makes adjustments to items of income and expense and allows
certain credits; and, ultimately, determines a deficiency against
the taxpayer of $2,100,000 and issues the taxpayer a statutory notice
of deficiency. The taxpayer petitions the notice to the United States
Tax Court. The Tax Court sustains the IRS’s position, in part,
resulting in a deficiency of $1,500,000. The IRS also computes, however,
that the total of tax, penalties, interest, additions to tax, and
additional amounts that could have resulted from the action, if the
court had sustained the IRS’s position, in full, was $2,500,000.
For purposes of section 7623 and §§ 301.7623-1 through
301.7623-4, the amount in dispute is $2,500,000.

(3) Gross income. For purposes of section
7623(b)(5) and §§ 301.7623-1 through 301.7623-4, the
term gross income has the same meaning as provided
under section 61(a). The IRS will compute the individual taxpayer’s
gross income, for purposes of award determinations described in §301.7623-3(c)(6),
when there has been a final determination of tax as defined in § 301.7623-4(d)(2).

(f) Affiliated claimant. For purposes
of §§ 301.7623-1 through 301.7623-4, the term affiliated claimant means an individual that files a claim
for award on behalf of another individual. See § 301.7623-1(b)(3)
for rules regarding ineligible affiliated claimants and § 301.7623-4(c)(4)
for rules regarding eligible affiliated claimants.

(g) Effective/applicability date. When
finalized, § 301.7623-2 is proposed to apply to information
submitted on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the FederalRegister and
to claims for award under sections 7623(a) and 7623(b) that are open
as of the date of publication of the Treasury decision adopting these
rules as final regulations in theFederal Register.

(a) In general. The Whistleblower Office
will pay awards under section 7623(a) and determine awards to individuals
under section 7623(b) in whistleblower administrative proceedings
pursuant to the rules of this section. The whistleblower administrative
proceedings described in this section are administrative proceedings
pertaining to tax administration for purposes of section 6103(h)(4).
See § 301.6103(h)(4)-1 for additional rules regarding disclosures
of return information in whistleblower administrative proceedings.
The Whistleblower Office may determine awards for claims involving
multiple actions in a single whistleblower administrative proceeding.
For purposes of applying the rules of this section, the Internal
Revenue Service (IRS) may rely on the claimant’s description
of the amount owed by the taxpayer(s). The IRS may, however, rely
on other information as necessary (for example, when the alleged amount
in dispute is below the $2 million threshold of section 7623(b)(5)(B),
but the actual amount in dispute is above the threshold).

(b) Awards under section 7623(a). (1) Preliminary award recommendation. In cases in which the
Whistleblower Office recommends payment of an award under section
7623(a), the Whistleblower Office will communicate a preliminary award
recommendation under section 7623(a) and §§ 301.7623-1
through 301.7623-4 to the claimant by sending a preliminary award
recommendation letter that states the Whistleblower Office’s
preliminary computation of the amount of collected proceeds, recommended
award percentage, recommended award amount (even in cases when the
application of section 7623(b)(2) or section 7623(b)(3) results in
a reduction of the recommended award amount to zero), and a list of
the factors that contributed to the recommended award percentage.
The whistleblower administrative proceeding described in paragraphs
(b)(1) and (2) of this section begins on the date the Whistleblower
Office sends the preliminary award recommendation letter. If the
claimant believes that the Whistleblower Office erred in evaluating
the information provided, the claimant has 30 days from the date the
Whistleblower Office sends the preliminary award recommendation to
submit comments to the Whistleblower Office. The Whistleblower Office
will review all comments submitted timely by the claimant (or the
claimant’s legal representative, if any) and pay an award, pursuant
to paragraph (b)(2) of this section.

(2) Decision letter. At the conclusion
of the process described in paragraph (b)(1) of this section, and
when there is a final determination of tax, as defined in § 301.7623-4(d)(2),
the Whistleblower Office will pay an award under section 7623(a) and
§§ 301.7623-1 through 301.7623-4. The Whistleblower
Office will communicate the amount of the award to the claimant in
a decision letter.

(3) Denials. If the Whistleblower Office
rejects a claim for award under section 7623(a), pursuant to § 301.7623-1(b)
or (c), or if the IRS either did not proceed with an action, as defined
in § 301.7623-2(b), or did not collect proceeds, as defined
in § 301.7623-2(d), then the Whistleblower Office will not
apply the rules of paragraphs (b)(1) or (2) of this section. The
Whistleblower Office will provide written notice to the claimant of
the denial of any award.

(c) Awards under section 7623(b). (1) Preliminary award recommendation. The Whistleblower Office
will prepare a preliminary award recommendation based on the Whistleblower
Office’s review of the administrative claim file and the application
of the rules of section 7623 and §§ 301.7623-1 through
301.7623-4 to the facts of the case. See paragraph (e)(2) of this
section for a description of the administrative claim file.

The whistleblower administrative proceeding described in paragraphs
(c)(1) through (6) of this section begins on the date the Whistleblower
Office sends the preliminary award recommendation letter. The preliminary
award recommendation is not a determination letter within the meaning
of paragraph (c)(6) of this section and cannot be appealed to Tax
Court under section 7623(b)(4) and paragraph (d) of this section.
The preliminary award recommendation will notify the individual that
the IRS cannot determine or pay any award until there is a final determination
of tax, as defined in § 301.7623-4(d)(2).

(2) Contents of preliminary award recommendation. The Whistleblower Office will communicate the preliminary award
recommendation under section 7623(b) to the individual by sending:

(i) A preliminary award recommendation letter that describes
the individual’s options for responding to the preliminary award
recommendation;

(ii) A summary report that states a preliminary computation
of the amount of collected proceeds, the recommended award percentage,
the recommended award amount (even in cases when the application of
section 7623(b)(2) or section 7623(b)(3) results in a reduction of
the recommended award amount to zero), and a list of the factors that
contributed to the recommended award percentage;

(iii) An award consent form; and

(iv) A confidentiality agreement.

(3) Opportunity to respond to preliminary award recommendation. The individual will have 30 days (this period may be extended
at the sole discretion of the Whistleblower Office) from the date
of the preliminary award recommendation letter to respond to the preliminary
award recommendation in one of the following ways:

(i) If the individual takes no action, then the Whistleblower
Office will make a final award determination, pursuant to paragraph
(c)(6) of this section;

(ii) If the individual signs, dates, and returns the award consent
form agreeing to the preliminary award recommendation and waiving
any and all administrative and judicial appeal rights, then the Whistleblower
Office will make an award determination, pursuant to paragraph (c)(6)
of this section;

(iii) If the individual signs, dates, and returns the confidentiality
agreement, then the Whistleblower Office will provide the individual
with an opportunity to review documents supporting the report, and
a detailed award report pursuant to paragraphs (c)(3) and (4) of this
section, and any comments submitted by the individual will be added
to the administrative claim file; or

(iv) If the individual submits comments on the preliminary award
recommendation to the Whistleblower Office, but does not sign, date,
and return the confidentiality agreement, then the comments will be
added to the administrative claim file and reviewed by the Whistleblower
Office in making an award determination, pursuant to paragraph (c)(6)
of this section.

(4) Detailed report. (i) Contents
of detailed report. If the individual signs, dates, and
returns the confidentiality agreement accompanying the preliminary
award recommendation under section 7623(b), pursuant to paragraph
(c)(3) of this section, then the Whistleblower Office will send the
individual:

(A) A detailed report that states a preliminary computation
of the amount of collected proceeds, the recommended award percentage,
and the recommended award amount, and provides a full explanation
of the factors that contributed to the recommended award percentage;

(B) Instructions for scheduling an appointment for the individual
(and the individual’s legal representative, if any) to review
information in the administrative claim file that is not protected
by one or more common law or statutory privileges; and

(C) An award consent form. The detailed report is not a determination
letter within the meaning of paragraph (c)(6) of this section and
cannot be appealed to Tax Court under section 7623(b)(4) and paragraph
(d) of this section. The detailed report will notify the individual
that the IRS cannot determine or pay any award until there is a final
determination of tax, as defined in § 301.7623-4(d)(2).

(ii) Opportunity to respond to detailed report. The individual will have 30 days (this period may be extended
at the sole discretion of the Whistleblower Office) from the date
of the detailed report to respond in one of the following ways:

(A) If the individual takes no action, then the Whistleblower
Office will make an award determination, pursuant to paragraph (c)(6)
of this section;

(B) If the individual requests an appointment to review information
from the administrative claim file that is not protected from disclosure
by one or more common law or statutory privileges, then a meeting
will be arranged pursuant to paragraph (c)(5) of this section;

(C) If the individual does not request an appointment but does
submit comments on the detailed report to the Whistleblower Office,
then the comments will be added to the administrative claim file and
reviewed by the Whistleblower Office in making an award determination
pursuant to paragraph (c)(6) of this section; or

(D) If the individual signs, dates, and returns the award consent
form agreeing to the preliminary award recommendation and waiving
any and all administrative and judicial appeal rights, then the Whistleblower
Office will make an award determination, pursuant to paragraph (c)(6)
of this section.

(5) Opportunity to review documents supporting award
report recommendations. Appointments for the individual
(and the individual’s legal representative, if any) to review
information from the administrative claim file that is not protected
from disclosure by one or more common law or statutory privileges
will be held at the Whistleblower Office in Washington, D.C., unless
the Whistleblower Office, in its sole discretion, decides to hold
the meeting at another location. At the appointment, the Whistleblower
Office will provide for viewing the pertinent information from the
administrative claim file. The Whistleblower Office will supervise
the individual’s review of the documents and the individual
will not be permitted to make copies of the documents. The individual
will have 30 days (this period may be extended at the sole discretion
of the Whistleblower Office) from the date of the appointment to submit
comments on the detailed report and the documents reviewed at the
appointment to the Whistleblower Office. All comments will be added
to the administrative claim file and reviewed by the Whistleblower
Office in making an award determination, pursuant to paragraph (c)(6)
of this section.

(6) Determination letter. After the individual’s
participation in the whistleblower administrative proceeding, pursuant
to paragraph (c) of this section, has concluded, and there is a final
determination of tax, as defined in § 301.7623-4(d)(2),
a Whistleblower Office official will determine the amount of the award
under section 7623(b)(1), (2), or (3), and §§ 301.7623-1
through 301.7623-4, based on the official’s review of the administrative
claim file. The Whistleblower Office will communicate the award to
the individual in a determination letter, stating the amount of the
award. If, however, the individual has executed an award consent
form agreeing to the amount of the award and waiving the individual’s
right to appeal the award determination, pursuant to section 7623(b)(4)
and paragraph (d) of this section, then the Whistleblower Office will
not send the individual a determination letter and will make payment
of the award as promptly as circumstances permit.

(7) Denials. If the Whistleblower Office
rejects a claim for award under section 7623(b), pursuant to § 301.7623-1(b)
or (c), or if, with respect to a claim for award under section 7623(b),
the IRS either did not proceed with an action, as defined in § 301.7623-2(b),
or did not collect proceeds, as defined in §301.7623-2(d), then
the Whistleblower Office will not apply the rules of paragraphs (c)(1)
through (6) of this section. The Whistleblower Office will send to
the claimant a preliminary denial letter that states the basis for
the denial of the claim. The whistleblower administrative proceeding
described in this paragraph begins on the date the Whistleblower Office
sends the preliminary denial letter. If the claimant believes that
the Whistleblower Office erred in evaluating the information provided,
the claimant has 30 days from the date the Whistleblower Office sends
the preliminary denial letter to submit comments to the Whistleblower
Office. The Whistleblower Office will review all comments submitted
timely by the claimant and, following that review, the Whistleblower
Office will either provide written notice to the claimant of the denial
of any award or apply the rules of paragraphs (c)(1) through (c)(6)
of this section.

(d) Appeal of award determination. Any
determination regarding an award under section 7623(b)(1), (2), or
(3) may, within 30 days of such determination, be appealed to the
Tax Court.

(e) Administrative record. (1) In general. The administrative record comprises all information
contained in the administrative claim file that is not protected by
one or more common law or statutory privileges that is relevant to
the award determination.

(2) Administrative claim file. The administrative
claim file will include the following materials relating to the action(s)
with respect to which the IRS proceeded based on the information provided
by the individual, as applicable, and to which the determination relates:

(i) The Form 211 filed by the individual and all information
provided by the individual (whether provided with the individual’s
original submission or through a subsequent contact with the IRS).

(ii) Copies of all debriefing notes and recorded interviews
held with the individual (and the individual’s representative,
if any).

(iii) Form(s) 11369, “Confidential Evaluation
Report on Claim for Award,” including narratives
prepared by the relevant IRS office(s), explaining the individual’s
contributions to the actions and documenting the actions taken by
the IRS in the case(s). The Form 11369 will refer to and incorporate
additional documents relating to the issues raised by the claim, as
appropriate, including, for example, relevant portions of revenue
agent reports, copies of agreements entered into with the taxpayer(s),
tax returns, and activity records.

(iv) Copies of all contracts entered into among the IRS, the
individual, and the individual’s legal representative (if any),
and an explanation of the cooperation provided by the individual (or
the individual’s legal representative, if any) under the contract.

(v) Any information that reflects actions by the individual
that may have had a negative impact on the IRS’s ability to
examine the taxpayer(s).

(vi) All correspondence and documents sent by the Whistleblower
Office to the individual.

(vii) All notes, memoranda, and other documents made by officers
and employees of the Whistleblower Office and considered by the official
making the award determination.

(viii) All correspondence and documents received by the Whistleblower
Office from the individual (and the individual’s legal representative,
if any) in the course of the whistleblower administrative proceeding.

(ix) All other information considered by the official making
the award determination.

(f) Effective/applicability date. When
finalized, § 301.7623-3 is proposed to apply to information
submitted on or after the date of publication of the Treasury decision
adopting these rules as final regulations in theFederal Register and
to claims for award under sections 7623(a) and 7623(b) that are open
as of the date of publication of the Treasury decision adopting these
rules as final regulations in theFederal Register.

Par. 6. Section 301.7623-4 is added to read as follows:

§ 301.7623-4 Amount and payment of award.

(a) In general. The Whistleblower Office
will pay all awards under section 7623(a) and determine all awards
under section 7623(b). For all awards under section 7623 and §§ 301.7623-1
through 301.7623-4, the Whistleblower Office will—

(1) Analyze the claim by applying the rules provided in paragraph
(c) of this section to the information contained in the administrative
claim file to determine an award percentage; and

(2) Multiply the award percentage by the amount of collected
proceeds. If the award determination arises out of a single whistleblower
administrative proceeding involving multiple actions, the Whistleblower
Office may determine separate award percentages on an action-by-action
basis and apply the separate award percentages to the collected proceeds
attributable to the corresponding actions. The Internal Revenue Service
(IRS) will pay all awards in accordance with the rules provided in
paragraph (d) of this section. All relevant factors will be taken
into account by the Whistleblower Office in determining whether an
award will be paid and, if so, the amount of the award. No person
is authorized under this section to make any offer or promise or otherwise
bind the Whistleblower Office with respect to the amount or payment
of an award.

(b) Factors used to determine award percentage. (1) Positive factors. The application of
the following non-exclusive factors may support increasing an award
percentage under paragraphs (c)(1) or (2) of this section:

(i) The individual acted promptly to inform the IRS or the taxpayer
of the tax noncompliance.

(ii) The information provided identified an issue of a type
previously unknown to the IRS.

(iii) The information provided identified taxpayer behavior
that the IRS was unlikely to identify or that was particularly difficult
to detect through the IRS’s exercise of reasonable diligence.

(iv) The information provided thoroughly presented the factual
details of tax noncompliance in a clear and organized manner, particularly
if the manner of the presentation saved the IRS work and resources.

(v) The individual (or the individual’s legal representative,
if any) provided exceptional cooperation and assistance during the
pendency of the action(s), for example by providing a useful technical
or legal analysis of the taxpayer’s records in response to a
request from the Whistleblower Office, the IRS, or the IRS Office
of Chief Counsel.

(vi) The information provided identified assets of the taxpayer
that could be used to pay liabilities, particularly if the assets
were not otherwise known to the IRS.

(vii) The information provided identified connections between
transactions, or parties to transactions, that enabled the IRS to
understand tax implications that might not otherwise have been understood
by the IRS.

(viii) The information provided had an impact on the behavior
of the taxpayer, for example by causing the taxpayer to correct a
previously-reported improper position.

(2) Negative factors. The application
of the following non-exclusive factors may support decreasing an award
percentage under paragraphs (c)(1) or (2) of this section:

(i) The individual delayed informing the IRS after learning
the relevant facts, particularly if the delay adversely affected the
IRS’s ability to pursue an action or issue.

(ii) The individual contributed to the underpayment of tax or
tax noncompliance identified.

(iii) The individual directly or indirectly profited from the
underpayment of tax or tax noncompliance identified.

(iv) The individual (or the individual’s legal representative,
if any) negatively affected the IRS’s ability to pursue the
action(s), for example by disclosing the existence or scope of an
enforcement activity.

(v) The individual (or the individual’s legal representative,
if any) violated instructions provided by the IRS, particularly if
the violation caused the IRS to expend additional resources.

(vi) The individual (or the individual’s legal representative,
if any) violated the terms of the confidentiality agreement described
in § 301.7623-3(b)(2).

(vii) The individual (or the individual’s legal representative,
if any) violated the terms of a contract entered into with the IRS
pursuant to § 301.6103(n)-2.

(viii) The individual provided false or misleading information
or otherwise violated the requirements of section 7623(b)(6)(C) or
§ 301.7623-1(c)(3).

(c) Amount of award percentage. (1) Award for substantial contribution. (i) In
general. If the IRS proceeds with any administrative or
judicial action based on information brought to the IRS’s attention
by an individual, such individual shall, subject to paragraphs (c)(2)
and (3) of this section, receive as an award at least 15 percent but
not more than 30 percent of the collected proceeds resulting from
the action (including any related actions) or from any settlement
in response to such action. The amount of any award under this paragraph
depends on the extent of the individual’s substantial contribution
to the action(s). See paragraph (c)(5) of this section for rules
regarding multiple claimants.

(ii) Computational framework. Starting
the analysis at the statutory minimum of 15 percent, the Whistleblower
Office will analyze the administrative claim file using the factors
listed in paragraph (b)(1) of this section to determine whether the
individual merits an increased award percentage of 22 percent or 30
percent. The Whistleblower Office may increase the award percentage
based on the presence and significance of positive factors. The Whistleblower
Office will then analyze the contents of the administrative claim
file using the factors listed in paragraph (b)(2) of this section
to determine whether the individual merits a decreased award percentage
of 15 percent, 18 percent, 22 percent, or 26 percent. The Whistleblower
Office may decrease the award percentage based on the presence and
significance of negative factors. Although the factors listed in
paragraphs (b)(1) and (2) of this section are described as positive
and negative factors, the Whistleblower Office’s analysis cannot
be reduced to a mathematical equation. The factors are not exclusive
and are not weighted and, in a particular case, one factor may override
several others. The presence and significance of negative factors
may offset the presence and significance of positive factors and,
while the presence and significance of negative factors alone cannot
result in an award percentage of less than 15 percent, the absence
of negative factors does not mean that an award percentage will be
greater than 15 percent.

(iii) Example. The operation of the provisions
of paragraph (c)(1)(ii) of this section may be illustrated by the
following example. The example is intended to illustrate the operation
of the computational framework. It is not intended to provide a standard
against which the substantial contribution of an individual submitting
a claim for award may be compared. The example provides a simplified
description of the facts relating to the claim for award, the information
provided, and the facts relating to the underlying tax case(s). The
application of section 7623(b)(1) and paragraph (c)(1)(ii) of this
section will depend on the specific facts of each case.

Example. Individual A, an employee in
Corporation’s sales department, submitted to the IRS a claim
for award under section 7623 and information indicating that Corporation
improperly claimed a credit in tax year 2006. Individual A’s
information consisted of numerous non-privileged documents relevant
to Corporation’s eligibility for the credit. Individual A’s
original submission also included an analysis of the documents, as
well as information about meetings in which the claim for credit was
discussed. When interviewed by the IRS, Individual A clarified ambiguities
in the original submission, answered questions about Corporation’s
business and accounting practices, and identified potential sources
to corroborate the information. Some of the documents provided by
Individual A were not included in Corporation’s general record-keeping
system and their existence may not have been easily uncovered through
normal IRS examination procedures. Corporation initially denied the
facts revealed in the information provided by Individual A, which
were essential to establishing the impropriety of the claim for credit.
IRS examination of Corporation’s return confirmed that the
credit was improperly claimed by Corporation in tax year 2006, as
alleged by Individual A. Corporation agreed to the ensuing assessments
of tax and interest and paid the liabilities in full. In this case,
Individual A provided specific and credible information that formed
the basis for action by the IRS. Individual A provided information
that was difficult to detect, provided useful assistance to the IRS,
and helped the IRS sustain the assessment. Based on the presence
and significance of these positive factors, viewed against all the
specific facts relevant to Corporation’s 2006 tax year, the
Whistleblower Office could increase the award percentage to 22 percent
of collected proceeds. If Individual A violated instructions provided
by the IRS and the violation caused the IRS to expend additional resources,
then the Whistleblower Office could, based on this negative factor,
reduce the award percentage to 18 percent or 15 percent (but not to
lower than 15 percent of collected proceeds).

(2) Award for less substantial contribution. (i) In general. If the Whistleblower Office
determines that the action described in paragraph (c)(1) of this section
is based principally on disclosures of specific allegations resulting
from public source information including a judicial or administrative
hearing; a government report, hearing, audit, or investigation; or
the news media, then the Whistleblower Office may determine an award
of no more than 10 percent of the collected proceeds resulting from
the action (including any related actions) or from any settlement
in response to such action. The appropriate amount of any award under
this paragraph depends on the significance of the individual’s
information and the role of the individual (and the individual’s
legal representative, if any) in contributing to the action(s). If
the individual is the original source of the public source information,
however, then the award percentage will be determined under paragraph
(c)(1) of this section.

(ii) Computational framework. The Whistleblower
Office will analyze the administrative claim file to determine whether
any of the information provided by the individual contained public
source information and, if it did, whether the action described in
paragraph (c)(1) of this section was based principally on the public
source information. The Whistleblower Office will make this determination
based on the extent to which the public source information described
a tax violation or facts and circumstances from which a tax violation
reasonably may be inferred. If the Whistleblower Office determines
that the action was based principally on public source information,
then, starting at 1 percent, the Whistleblower Office will analyze
the administrative claim file using the factors listed in paragraph
(b)(1) of this section to determine whether the individual merits
an increased award percentage of 4 percent, 7 percent, or 10 percent.
The Whistleblower Office will then determine whether the individual
merits a decreased award percentage of zero, 1 percent, 4 percent,
or 7 percent using the factors listed in paragraph (b)(2). The Whistleblower
Office may increase the award percentage based on the presence and
significance of positive factors and may decrease the award percentage
based on the presence and significance of negative factors. Like
the analysis described in paragraph (c)(1)(ii) of this section, the
Whistleblower Office’s analysis cannot be reduced to a mathematical
equation. The factors are not exclusive and are not weighted and,
in a particular case, one factor may override several others. The
presence and significance of negative factors may offset the presence
and significance of positive factors or result in a zero award, but
the absence of negative factors does not mean that an award percentage
will be greater than 1 percent.

(iii) Example. The operation of the provisions
of paragraph (c)(2)(ii) of this section may be illustrated by the
following example. The example is intended to illustrate the operation
of the computational framework. It is not intended to provide a standard
against which the substantial contribution of an individual submitting
a claim for award may be compared. The example provides a simplified
description of the facts relating to the claim for award, the information
provided, and the facts relating to the underlying tax case(s). The
application of section 7623(b)(2) and paragraph (c)(2)(ii) of this
section will depend on the specific facts of each case.

Example. Individual A submitted to the
IRS a claim for award under section 7623 and information indicating
that Taxpayer B was the defendant in a criminal prosecution for embezzlement.
Individual A’s information further indicated that evidence
presented at Taxpayer B’s trial revealed Taxpayer B’s
efforts to conceal the embezzled funds by depositing them in bank
accounts of entities controlled by Taxpayer B. In this case, Individual
A’s information is based principally on disclosures of specific
allegations resulting from a judicial hearing. Absent information
demonstrating that the investigation leading to the embezzlement charge
was based on information provided by Individual A, section 7623(b)(2)
and paragraph (c)(2) of this section applies to the determination
of Individual A’s award. In this case, there is no reason for
the Whistleblower Office to increase the applicable award percentage
above 1 percent, the starting point for its analysis, given the absence
of positive factors. Accordingly, Individual A may receive an award
of 1 percent of collected proceeds.

(3) Reduction in award and denial of award. (i) In general. If the Whistleblower Office
determines that a claim for award is brought by an individual who
planned and initiated the actions, transaction, or events (underlying
acts) that led to the underpayment of tax or actions described in
section 7623(a)(2), then the Whistleblower Office may appropriately
reduce the amount of the award percentage that would otherwise result
under section 7623(b)(1) and paragraph (c)(1) of this section or section
7623(b)(2) and paragraph (c)(2) of this section, as applicable. The
Whistleblower Office will deny an award if the individual is convicted
of criminal conduct arising from his or her role in planning and initiating
the underlying acts.

(ii) Threshold determination. An individual planned and initiated the underlying acts if the individual:

(A) Designed, structured, drafted, arranged, formed the plan
leading to, or otherwise planned, an underlying act,

(B) Took steps to start, introduce, originate, set into motion,
promote or otherwise initiate an underlying act, and

(C) Knew or had reason to know that there were tax implications
to planning and initiating the underlying act. The individual need
not have been the sole person involved in planning and initiating
the underlying acts. An individual who merely furnishes typing, reproducing,
or other mechanical assistance in implementing one or more underlying
acts will not be treated as initiating any underlying act. If the
Whistleblower Office determines that an individual has satisfied this
initial threshold of planning and initiating, the Whistleblower Office
will then reduce the award amount based on the extent of the individual’s
planning and initiating, pursuant to paragraph (c)(3)(iii) of this
section.

(iii) Computational framework. After determining
the award percentage that would otherwise result from the application
of section 7623(b)(1) and paragraph (c)(1) of this section or section
7623(b)(2) and paragraph (c)(2) of this section, as applicable, the
Whistleblower Office will analyze the administrative claim file to
make the threshold determination described in paragraph (c)(3)(ii)
of this section. If the individual is determined to have planned
and initiated the underlying acts, then the Whistleblower Office will
reduce the award based on the extent of the individual’s planning
and initiating. The Whistleblower Office’s analysis and the
amount of the appropriate reduction determined in a particular case
cannot be reduced to a mathematical equation. To determine the appropriate
award reduction, the Whistleblower Office will:

(A) Categorize the individual’s role as a planner and
initiator as primary, significant, or moderate; and

(B) Appropriately reduce the award percentage that would otherwise
result from the application of section 7623(b)(1) and paragraph (c)(1)
of this section or section 7623(b)(2) and paragraph (c)(2) of this
section, as applicable, by 67 percent to 100 percent in the case of
a primary planner and initiator, by 34 percent to 66 percent in the
case of a significant planner and initiator, or by 0 percent to 33
percent in the case of a moderate planner and initiator. If the individual
is convicted of criminal conduct arising from his or her role in planning
and initiating the underlying acts, then the Whistleblower Office
will deny an award without regard to whether the Whistleblower Office
categorized the individual’s role as a planner and initiator
as primary, significant, or moderate.

(iv) Factors demonstrating the extent of an individual’s
planning and initiating. The application of the following
non-exclusive factors may support a determination of the extent of
an individual’s planning and initiating of the underlying acts:

(A) The individual’s role as a planner and initiator.
Was the individual the sole decision-maker or one of several contributing
planners and initiators?

(B) The nature of the individual’s planning and initiating
activities. Was the individual involved in legitimate tax planning
activities? Did the individual take steps to hide the actions at
the planning stage? Did the individual commit any identifiable misconduct
(legal, ethical, etc.)?

(C) The extent to which the individual knew or should have known
that tax noncompliance could result from the course of conduct.

(D) The extent to which the individual acted in furtherance
of the noncompliance, including, for example, efforts to conceal or
disguise the transaction.

(E) The individual’s role in identifying and soliciting
others to participate in the actions reported, whether as parties
to a common transaction or as parties to separate transactions.

(v) Examples. The operation of the provisions
of paragraphs (c)(3)(ii) and (iii) of this section may be illustrated
by the following examples. These examples are intended to illustrate
the operation of the computational framework. They are not intended
to provide standards against which the planning and initiating of
an individual submitting a claim for award may be compared. The examples
provide simplified descriptions of the facts relating to the claim
for award, the information provided, and the facts relating to the
underlying tax case. The application of section 7623(b)(3) and paragraph
(c)(3) of this section will depend on the specific facts of each case.

Example 1. Individual A is employed in
the finance department of a corporation (Corporation 1) and is responsible
for performing research and drafting activities for, and at the direction
of, Supervisor B. Individual A performed research on financial products
for Supervisor B that Supervisor B used in advising Corporation 1
on a financial strategy. After Corporation 1 executed the strategy,
Individual A submitted a claim for award under section 7623 along
with information about the strategy to the IRS. The IRS initiated
an examination of Corporation 1 based on Individual A’s information,
determined deficiencies in tax and penalties, and ultimately assessed
and collected the tax and penalties as determined. Individual A did
nothing to design or set into motion Corporation 1’s activities.
Individual A did not know or have reason to know that there were
tax implications to the research activities. Accordingly, as a threshold
matter, Individual A was not a planner and initiator of Corporation
1’s strategy, and the award that would otherwise be determined
based on the application of section 7623(b)(1) and paragraph (c)(1)
of this section is not subject to reduction under section 7623(b)(3)
and paragraph (c)(3) of this section.

Example 2. Individual C is employed in
the HR department of a corporation (Corporation 2). Corporation 2
tasked Individual C with hiring a large number of temporary employees
to meet Corporation 2’s seasonal business demands. Individual
C organized, scheduled, and conducted job fairs and job interviews
to hire the seasonal employees. Individual C was not responsible
for, had no knowledge of, and played no part in, classifying the seasonal
employees for Federal income tax purposes. Individual C later discovered,
however, that Corporation 2 classified the seasonal employees as independent
contractors. After discovering the misclassification, Individual
C submitted a claim for award under section 7623 along with non-privileged
information describing the employee misclassification to the IRS.
The IRS initiated an examination of Corporation 2 based on Individual
C’s information, determined deficiencies in tax and penalties,
and ultimately assessed and collected the tax and penalties as determined.
The award that would otherwise be determined based on the application
of section 7623(b)(1) and paragraph (c)(1) of this section would not
be subject to a reduction under section 7623(b)(3) and paragraph (c)(3)
of this section because Individual C did not satisfy the requirements
of the threshold determination of a planner and initiator. Individual
C did not know and had no reason to know that her actions had tax
implications or that Corporation 2 would misclassify the employees
as independent contractors.

Example 3. Individual D is employed as
a supervisor in the finance department of a corporation (Corporation
3) and is responsible for planning Corporation 3’s overall financial
strategy. Pursuant to the overall financial strategy, Individual
D and others at Corporation 3, in good faith but incorrectly, planned
tax-advantaged transactions. Individual D and others at Corporation
3 prepared documents needed to execute the transactions. After Corporation
3 executed the transactions, Individual D submitted a claim for award
under section 7623 along with non-privileged information about the
transactions to the IRS. The IRS initiated an examination of Corporation
3 based on Individual D’s information, determined deficiencies
in tax and penalties, and ultimately assessed and collected the tax
and penalties as determined. The award that would otherwise be determined
based on the application of section 7623(b)(1) and paragraph (c)(1)
of this section would be subject to an appropriate reduction under
section 7623(b)(3) and paragraph (c)(3) of this section because Individual
D satisfies the requirements of the threshold determination of a planner
and initiator. Individual D planned the transactions, prepared the
necessary documents, and knew the tax implications of the transactions.
Individual D was not the sole planner and initiator of Corporation
3’s transactions. Individual D did nothing to conceal Corporation
3’s activities. Corporation 3 had a good faith basis for claiming
the disallowed tax benefits. On the basis of those facts, Individual
D was a moderate-level planner and initiator. Accordingly, the Whistleblower
Office will exercise its discretion to reduce Individual D’s
award by 0 to 33 percent.

Example 4. Same facts as Example
3, except that Individual D independently planned a high-risk
tax avoidance transaction and prepared draft documents to execute
the transaction. Individual D presented the transaction, along with
the draft documents, to Corporation 3’s Chief Financial Officer.
Without the further involvement of Individual D, Corporation 3’s
Chief Financial Officer, Chief Executive Officer, and Board of Directors
subsequently approved the execution of the transaction. After Corporation
3 executed the transaction, Individual D submitted a claim for award
under section 7623 along with non-privileged information about the
transaction to the IRS. The IRS initiated an examination of Corporation
3 based on Individual D’s information, determined deficiencies
in tax and penalties, and ultimately assessed and collected the tax
and penalties as determined. The award that would otherwise be determined
based on the application of section 7623(b)(1) and paragraph (c)(1)
of this section would be subject to an appropriate reduction under
section 7623(b)(3) and paragraph (c)(3) of this section because Individual
D satisfies the requirements of the threshold determination of a planner
and initiator. Individual D planned the transaction, prepared the
necessary documents, and knew the tax implications of the transaction.
Working independently, Individual D designed and took steps to effectuate
the transaction while knowing that the planning and initiating of
the transaction was likely to result in tax noncompliance. Individual
D, however, did not approve the execution of the transaction by Corporation
3 and, therefore, was not a decision-maker. On the basis of those
facts, Individual D was a significant-level planner and initiator.
Accordingly, the Whistleblower Office will exercise its discretion
to reduce Individual D’s award by 34 to 66 percent.

Example 5. Individual E is a financial
planner. Individual E designed a financial product that the IRS identified
as an abusive tax avoidance transaction. Individual E marketed the
transaction to taxpayers, facilitated their participation in the transaction,
and, initially, took steps to disguise the transaction. After several
taxpayers had participated in the transaction, Individual E submitted
a claim for award under section 7623 along with non-privileged information
to the IRS about the transaction and the participating taxpayers.
The IRS initiated an examination of the identified taxpayers based
on Individual E’s information, determined deficiencies in tax
and penalties, and ultimately assessed and collected the tax and penalties
as determined. Individual E was not criminally prosecuted. The award
that would otherwise be determined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section would be subject to
an appropriate reduction under section 7623(b)(3) and paragraph (c)(3)
of this section because Individual E satisfies the requirements of
the threshold determination of a planner and initiator. Individual
E designed the financial product, marketed and facilitated its use
by taxpayers, and knew the tax implications of the transaction. Individual
E was the sole designer of the transaction, solicited clients to participate
in the transaction, and facilitated and attempted to conceal their
participation in the transaction. Individual E knew that the planning
and initiating of the taxpayers’ participation in the transaction
was likely to result in tax noncompliance. On the basis of those
facts, Individual E was a primary-level planner and initiator. Accordingly,
the Whistleblower Office will exercise its discretion to reduce Individual
E’s award by 67 to 100 percent.

(4) Eligible affiliated claimants. (i) In general. If the Whistleblower Office determines that
an affiliated claimant, as defined in § 301.7623-2(f), filed
a claim for award based on information obtained from an otherwise
eligible individual for the purpose of avoiding any reduction in the
amount of any award that could result if the claim was filed by the
otherwise eligible individual, then the Whistleblower Office may,
for purposes of determining the amount of an award, treat the claim
as if it had been filed by the otherwise eligible individual. Any
award to the affiliated claimant that filed the claim for award will
be paid pursuant to paragraph (d)(1) of this section. See § 301.7623-1(b)(3)
for rules regarding ineligible affiliated claimants.

(ii) Example. Individual A is employed
as a supervisor in the finance department of Corporation. Individual
A planned and initiated the actions that led to an underpayment of
tax by Corporation, within the meaning of section 7623(b)(3) and paragraph
(c)(3) of this section. To avoid the application of section 7623(b)(3)
and paragraph (c)(3) of this section, Individual A provided non-privileged
information to Individual B that described and documented specific
facts relating to Corporation’s tax underpayment. Individual
B did not plan and initiate the actions that led to an underpayment
of tax by Corporation. Individual B submitted to the IRS the information
received from Individual A, alleging that Corporation owed additional
taxes and filing a claim for award under section 7623. The IRS proceeded
with an examination of Corporation based on the information provided
by Individual B, determined a deficiency against Corporation and,
ultimately, collected proceeds from Corporation. For purposes of
determining the amount of any award payable to Individual B, as the
individual that filed the claim for award, the Whistleblower Office
may treat the claim as if it had been filed by Individual A.

(5) Multiple claimants. If two or more
independent claims relate to the same collected proceeds, then the
Whistleblower Office may evaluate the contribution of each individual
to the action(s) that resulted in collected proceeds. The Whistleblower
Office will determine whether the information submitted by each individual
would have been obtained by the IRS as a result of the information
previously submitted by any other individual. If the Whistleblower
Office determines that multiple individuals submitted information
that would not have been obtained based on a prior submission, then
the Whistleblower Office will determine the amount of each individual’s
award based on the extent to which each individual contributed to
the action(s). The aggregate award amount in cases involving two
or more independent claims that relate to the same collected proceeds
will not exceed the maximum award amount that could have resulted
under section 7623(b)(1) or section 7623(b)(2), as applicable, subject
to the award reduction provisions of section 7623(b)(3), if a single
claim had been submitted.

(d) Payment of Award. (1) In
general. The IRS will pay any award determined under section
7623 and §§ 301.7623-1 through 301.7623-4 to the individual(s)
that filed the corresponding claim for award. Payment of an award
will be made as promptly as the circumstances permit, but not until
there has been a final determination of tax with respect to the action(s),
as defined in paragraph (d)(2) of this section, the Whistleblower
Office has determined the award, and all appeals of the Whistleblower
Office’s determination are final or the individual has executed
an award consent form agreeing to the amount of the award and waiving
the individual’s right to appeal the determination.

(2) Final determination of tax. For purposes
of §§ 301.7623-1 through 301.7623-4, a final
determination of tax means that the proceeds resulting
from the action(s) subject to the award determination have been collected
and either the statutory period for filing a claim for refund has
expired or the taxpayer(s) subject to the action(s) and the IRS have
agreed with finality to the tax or other liabilities for the period(s)
at issue and the taxpayer(s) have waived the right to file a claim
for refund.

(3) Joint Claimants. If multiple individuals
jointly submit a claim for award, the IRS will pay any award in equal
shares to the joint claimants unless the joint claimants specify a
different allocation in a written agreement, signed by all the joint
claimants and notarized, and submitted with the claim for award.
The aggregate award payment in cases involving joint claimants will
be within the award percentage range of section 7623(b)(1) or section
7623(b)(2), as applicable, and subject to the award reduction provisions
of section 7623(b)(3).

(4) Deceased Claimant. If a claimant dies
before or during the whistleblower administrative proceeding, the
Whistleblower Office will substitute an executor, administrator, or
other legal representative on behalf of the deceased claimant for
purposes of conducting the whistleblower administrative proceeding.

(5) Tax treatment of award. All awards
are subject to current Federal tax reporting and withholding requirements.

(e) Effective/applicability date. When
finalized, § 301.7623-4 is proposed to apply to information
submitted on or after the date of publication of the Treasury decision
adopting these rules as final regulations in theFederal Register and
to claims for award under section 7623(b) that are open as of the
date of publication of the Treasury decision adopting these rules
as final regulations in theFederal Register.

Steven T. Miller, Deputy Commissioner for Services
and Enforcement.

Note

(Filed by the Office of the Federal Register on December 14,
2012, 4:15 p.m., and published in the issue of the Federal Register
for December 18, 2012, 77 F.R. 74798)

Drafting Information

The principal authors of these regulations are Meghan M. Howard
and Robert T. Wearing of the Office of the Associate Chief Counsel
(Procedure and Administration).